The Reserve Bank of Australia(RBA) has decided to increment the interest rate to 2.60 per cent and the Exchange settlement has also been increased to 2.50 per cent.
The purpose of incrementing the cash rate is clear, the RBA wants to bring back the inflation rate to 2-3 per cent. The hike in the cash rate will help achieve that goal and we’re expecting further increments over the coming period. The interest in Australia has seen big hikes in a short time. The recent 25 basis point increment reflects that the RBA board is assessing the inflation and GDP growth in Australia.
After the pandemic, most countries have been experiencing high inflation and in some countries increased inflation caused political instability also. Australia could not escape the post-pandemic effects. One main factors contributing to high inflation is the an imbalance between supply and demand. We have seen a strong domestic demand while the supply chain still can’t meet that demand, thus causing inflation.
For a layman the analogy is very simple, if we have a limited amount of goods and more buyers of the same interests. The buyers will then compete with each other to buy the same product. And whoever bids the most price will own the product. So we are facing the same problem now the supply chain has not fully recovered after the pandemic. Some major cities in China are still under Lockdown, with one of the largest exporters. The money supply in the market is the same. The RBA decided to lower the money supply to bring the rising inflation down back to its normal position of 2-3 per cent. The RBA has forecasted that when the supply chain will get back to its prior position, we will see a significant drop in the inflation rate by 2024 and the CPI for that year is predicted around 3 per cent.
The Australian Economy is growing continuously, unlike many other developed countries. The unemployment rate has been the lowest, just around 2-3 per cent. The labour market is facing is shortage of staff and facing difficulties in hiring new staff. Job vacancies and job ads are everywhere hinting toward a further decline in the unemployment rate.
Obviously, the economy will slow down after the RBA decision to increase the cash rate, and we will see a little increment in the unemployment rate in the coming days.
Major uncertainties lie in the form of deteriorating global economic conditions and Australia will, of course, have to bear the effects of the deteriorating situation. Another factor is household spending and how it reacts to the tightening economic condition such as higher inflation rate and higher cash rate. The housing market is facing a big decline, the median house prices have declined significantly due to higher mortgage rates. Unlike the rest of the world, Australian workers are finding jobs and earning more than before.
Recent cash rate increments will hopeful stabilize the supply and demand of goods for Australian consumers. It’s crucial to decrease the inflation rate, though Australian economy will contract for a while, till things get back to normal.
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